Is Arena Pharmaceuticals Any More Attractive Now That the Dust Is Settling?

The numbers surrounding ARNA that matter now look enticing

Arena Pharmaceuticals (NASDAQ:ARNA) … what a wild roller coaster ride this stock has been. It was all the rage leading up to the approval of its weight-loss drug Belviq (lorcaserin) on June 27, with the stock soaring from $2.43 at the end of April to $13.45 immediately after the FDA announced the good news. That’s a 453% move in less than two months.

Click to Enlarge I just hope you got out (i.e. took profits) right when a truckload of investors were planning on piling in following the approval. Why? Because the stock started to tumble immediately after that post-approval surge. Between then and now, Arena has fallen back from that $13.45 start following the drug’s approval to Tuesday’s closing price of $7.36. That’s a 45% stumble.

Here’s the deal: While I don’t know that the absolute bottom has been made, I do think it’s time to start prepping an entrance strategy for a position in the stock … for a couple of reasons. First things first, though.

Like I Said …

“… the value of Arena Pharmaceuticals shares might already have priced in the approval of lorcaserin (it’s up almost 300% since late April), leaving the stock nowhere else to go once any good news is released. Oh, we’ll possibly see a knee-jerk bullish bump with an approval. By and large, though, the market already has seen the writing on the wall, and any such bump likely will last less than a day. If anything, that strength will be support for folks to start booking profits into.”

It wasn’t a popular stance at the time, even though — unfortunately — it all panned out like I described. In fact, I was expecting people to show up at my door with pitchforks.

I’m not revisiting the stock now to gloat, however. I’m revisiting Arena again to tie up another loose end I left open the first time around:

“… the time to buy ARNA was either in early May before the advisory panel voted favorably on the drug, or will be after the dust settles — and the stock pulls back — after any approval.”

Well, guys, the dust is settling.

Eventually, It’s All About the Numbers

Contrary to popular belief, I don’t hate Arena, and I have no reason to bash the stock. It is maddening when the hype surrounding a stock drowns out its true value, however, and that’s exactly what happened with ARNA.

Look closer, though. The hype is fading. So too is the bullish interest, but that’s OK, since at least with the smoke-clearing we can start to do what we should have done a long time ago … crunch the numbers, which (surprise) actually look compelling.

To be fair, most of the numbers still are rough guesses at this point, but they’re good enough to lay the groundwork. There really are only three numbers at the core of the question, though:

$60.9 billion, $220 million and $2.6 billion.

The first ($60.9 billion) is the size of the United States’ weight-loss market, the second ($220 million) is the size of the current diet-pill market, and the third ($2.6 billion) is the forecast size of the diet-pill market by 2020. That’s right — the U.S. diet pill market is expected to grow from $220 million now to as much as $2.6 billion by 2020. And, given that Americans are willing to spend more than $60 billion per year to lose weight, I don’t doubt it.

And just for the record, some forecasters say the annual spend on diet pills could be much greater than $2.6 billion. At one point, Piper Jaffray said Belviq would produce as much as $3 billion in revenue by 2015.

For comparison, Arena’s current market cap is only $1.3 billion, and bear in mind that the weight-loss drug isn’t the only item in the company’s pipeline.

Given all that, Belviq wouldn’t have to capture anywhere near all of the diet-pill market share to more than justify a moderately higher stock price at some point in the foreseeable future. Now it’s just a matter of finding the ideal entry spot.

And what about Qsymia, the competing weight-loss drug from Vivus (NASDAQ:VVUS)? Ironically, VVUS shares have been through the same bullish-to-bearish wringer ARNA shares have. But, logistically speaking, Qsymia might not be much of a threat to Arena since the weight-losing components of the drug now are available as a generic. In fact, the drug might be on the verge of a patent war regarding use of that drug as a weight-loss agent. Add in the fact that Qsymia will — initially, anyway — be available only by mail order while Belviq will be in the experienced hands of Eisai’s sales force, and Arena appears to have an edge.

If anything, Contrave — the weight-loss drug being developed by Orexigen (NASDAQ:OREX) — is the more direct threat. But it won’t be up for FDA approval until sometime in 2014.

Bottom Line

Arena will be posting its Q2 SEC filing on Thursday. I doubt it will tell us anything we don’t already know. The company does little in the way of revenue, Belviq is nowhere near mass production, and anything meaningful the company could do — like transferring the drug’s approved application to Eisai — already has been disclosed.

While I’m in the “no news is good news camp,” I’ve got a feeling if the company doesn’t come up with something riveting to talk about on Thursday, the market’s disinterest is going to peak (or is it bottom?). Either way, that lull in interest also is apt to mark the bottom for the stock, particularly if the stock dives sharply. That pullback, or the next major pullback whenever it happens, should be a great long-term entry point into a position, right when nobody else cares.

Or as Warren Buffett says, “You can’t buy what’s popular and do well.”

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.